Wheat Supply and Demand Balance Improving

Feeding of wheat by livestock producers remains strong while persistent drought in the Great Plains continues to threaten prospects for the nation’s hard winter wheat. So why are wheat prices falling? The projected world wheat crop is larger than expected and exports out of the Ukraine are expected to increase.

"With a decent wheat crop, we don’t need to have wheat prices at this level," says Jerrod Kitt, director of research with the Linn Group, Chicago. Currently, he says, the price momentum for wheat is to the downside.

"Wheat is working pretty good into western feed rations, primarily cattle," says Kitt. "U.S. soft red winter wheat is the cheapest in the world, no doubt about it." Yet despite low prices, export sales have been disappointing.

Drought continues to be a major concern in the hard red winter wheat-growing region of the Great Plains, but that doesn’t mean the region will have a poor wheat crop. "With good spring rains, we could get a good crop," says Kitt.

According to the latest U.S. Drought Monitor, severe to exceptional drought completely blankets Nebraska, Kansas, and Oklahoma, and the vast majority of South Dakota.

The eastern soft red winter wheat crop, however, entered dormancy in good condition despite early concerns about lack of snow cover. "The plant was so bushy that it sort of formed its own ‘snow cover,’ " Kitt notes.

USDA narrowed its projected U.S. seasonal-average farm price for wheat by 5 cents on both the low and the high end of the range to $7.70 to $8.10 per bushel, but analysts expect prices to continue to weaken, particularly if USDA does not reduce its forecast for world wheat production.

Surprise! Argentina Output Unchanged

USDA left global wheat supplies for 2012-13 nearly unchanged—despite expected declines in Argentina. The department lowered projected global wheat production by only 0.7 million tons to 653.61 million metric tons. Global wheat consumption was also virtually unchanged at 673.43 million metric tons. However, global consumption is projected to be 24.6 million tons lighter in 2012-13, compared with the 2011-12 crop year, as feed use moderates.

"I was disappointed that USDA didn’t true up the world stats," says Kitt. "I expected USDA to take 1 million to 2 million metric tons out of Argentina." USDA left Argentina’s projected wheat production unchanged at 11 million metric tons. "Most of the private trade expects a wheat crop in Argentina of 9 million to 10 million tons," says Kitt.

World wheat ending stocks for the 2012-13 crop year were also basically unchanged at 176.7 million tons. Lower projected ending stocks in the United States and Morocco offset higher stocks in Iran, South Korea, and Ukraine.

In other news, the CME Group plans to end pit trading at the Kansas City Board of Trade on June 28. Open outcry trading for the hard red winter wheat contracts will move to Chicago, pending regulatory approval.